Helping to protect landowners right for the extraction of Natural Gas.

Helping to protect landowners' rights for the extraction of Natural Gas.

Wednesday, April 20, 2011

Energy Lessons from Libya & Japan: Focus on US Natural Gas

WASHINGTON - What is the connection between the post-tsunami nuclear disaster at the Fukushima Dai-ichi plant in North Eastern Japan, UN backed military intervention in Libya, rebellion in Bahrain and Yemen and the Barnett gas shale deposits in Texas? Very simple. It is all about US and world energy: its availability, its cost and its safety.

Whatever the outcome of any future investigations on what failed and why at Fukushima Dai-ichi, it is obvious that this accident, reported and commented on in excruciating detail all over the world, has at the very least lessened the appetite for more nuclear energy. In the US this accident brought back ugly memories of the 1979 Three Mile Island accident just when nuclear industry proponents thought that they had been finally buried and that we could go ahead and start building new plants after an incredibly long, 30 years hiatus.

New nuclear power plants for America?

Indeed, there has been a lot of action on nuclear power in the US. There is now an impressive backlog of new projects waiting for the vetting and approval process. Of course, all this renewed nuclear enthusiasm was based on a number of positives. Nuclear power is reliable and it is clean. In fact, its environmental credentials are such that many environmentalists embraced it. Even though there are uncertainties about the ultimate disposal of radio active waste, the actual operation of a nuclear power plant beats a coal fired plant in terms of environmental impact, as it has none, (if you exclude the amount of carbon based energy needed to build it).

Clean energy

If you leave aside the issue of eventual nuclear waste disposal and if you believe nuclear industry and regulators assurances that new design and other improvements allow the construction of extra safe, disaster resistant and human error resistant plants then the only huge obstacle is cost and thus financing, as nuclear power plants are very expensive to build; even though the initial investment will be recovered through cost effective operations that do guarantee a good rate of return. With all that, until today, it appeared that nuclear industry prospects had really improved.

After Fukushima Dai-ichi, forget about it

But now, after Fukushima Dai-ichi, forget about all this. This is Three Mile Island on steroids. Ask any community in the US, after they have been glued to their TVs, watching the Japanese tragedy unfold, if they want a nuclear power plant in their vicinity. See what warm response you get. Ask major banks to finance a nuclear plant and see how eager they are to lend you the money.

If not nuclear, then what?

This major accident in Japan in the end may not kill the entire idea of additions to the nuclear base as a source of new electricity. But you can bet that it will slow it down. So, if we do not want to rely entirely on otherwise abundant US coal as it is still dirty and highly polluting, what’s the alternative? Well, while we can and should look at wind and solar and what not as long term non-carbon alternatives, right now, the low hanging fruit is relatively clean, abundant US produced natural gas. More on this in a moment.

Oil uncertainties

If we turn to Libya and the ongoing crisis that now prompted a US-led, (for the moment), costly military intervention and the crisis’ consequences on oil prices, then we are once again reminded that the US, with 5% of the world population consumes over 20% of the world energy, most of it imported and some of it imported from the Middle East. This dependence has a number of disadvantages.

The staggering cost of oil

Even in normal times, without crises and uphevals that shut down production, it is very expensive. America spends in excess of 360 billion a year to import more than 60% of the oil we burn, mostly as gasoline. Now prices are up, so expect a higher oil bill for 2011. And this is not all. To have a real picture of the “total” cost of oil, we should add to it the indirect cost of a national security apparatus maintained in some measure at least to guarantee the free flow and unhindered supply of oil. In other words, part of the taxpayers money allocated to national defense can be considered some sort of oil security insurance premium. You do not see this at the pump, but you pay for it anyway.

Keep the oil flowing

Indeed, as we do not want to be completely at the mercy of events in oil producing areas of the world, we commit resources aimed in part at least at policing those regions and at intervening, if necessary, to restore the free flow of oil.

The intervention in Libya is not officially about oil. But oil is in the background. And no national security expert would dispute that a post-Gaddafi, pro-western Libya that would aggressively pursue oil exploration would be a net plus for an oil thirsty world. Any development that increases the overall amount and availability of supply is a bonus. Conversely any conflict, or potential conflict in a major oil producing region is a potential or real disaster. (Does anybody want to think about what is happening now in Libya occurring instead in Saudi Arabia, by far the biggest oil exporter in the region?)

US natural gas creates a real alternative

So, nuclear power is dangerous, oil supplies are expensive on a good day, unreliable and thus even more expensive on bad day. And this gets us to US natural gas. This is the most unreported major energy story, a story about the true “game changer” that can effectively transform the energy equation in America, at least for many decades.

New technologies: “hydraulic fracturing”

The basis of the story is in technological innovations –called “hydraulic fracturing”– that allow now the commercially viable exploitation of natural gas deposits trapped in rock formation that were considered uneconomic until a few years ago. But new techniques, developed first in Texas and then adopted elsewhere, have completely transformed the natural gas picture in America.

From a situation in which it was thought that domestic natural gas production had peaked and that America would have to rely on large amounts of imported gas, now it is completely the reverse. With the new hydraulic fracturing techniques, now widely used, huge shale gas basins have been aggressively exploited.

Environmental concerns

There are open issues of environmental pollution that can be caused by the use of water laced with chemicals that is an integral part of the hydraulic fracturing process. There have been negative news stories and enforcement actions by state authorities pursuing polluters. But, for the moment at least, the technology is considered safe. While accidents have occurred, they are not attributed to systemic shortcomings that make this process inherently unsafe.

Shale gas, shale gas everywhere

And there is a lot of new gas in America. In the North East there is the vast Marcellus shale basin encompassing a huge chunk of Pennsylvania, part of Ohio and New York State. But then there is also Woodford shale in Oklahoma, Antrim shale in Michigan, Barnett shale in Texas and Haynesville shale in Louisiana, now considered the biggest single deposit in America.

Aside from the obvious local economic growth advantages in terms of investments, new jobs, tax revenues, royalties paid to land owners and what not, all this new gas is a tremendous bonus for the entire American economy.

A bonus for America: more than 100 years of gas

Let’s see why. According to different estimates, with the addition of shale gas and other improvements that allow for a more effective exploitation of each gas well, America’s total gas reserves could last well beyond 100 years, some say a lot more. And here is the prize: compared to equal quantities of oil, natural gas costs about 1/4. And of course, if oil prices keep going up, the advantage for gas improves, as we do not expect a war in Texas or Ohio that will disrupt supplies.

Shale oil not as abundant

Now, this is really a fantastic development. True enough, the same fracturing technologies can be applied to shale oil. And this is happening in Bakken, North Dakota, that is now producing a respectable 400,000 barrels a day, with a possible peak at 800,000. But, for the moment at least, the known US shale oil basins are not as vast as shale gas ones. So, while more domestic oil is always welcome, shale gas is the real big story.

How do you use gas?

Now what do you with all this gas? The conventional use is of course as fuel for power plants. You make electricity. Compared to other conventional fuels such as coal, natural gas is cost competitive and much, much cleaner. Compared to nuclear, well, it does not cause radiations in case of an accident. Compared to renewables, at least at this stage in their development, it is cheaper.

Gas as transportation fuel is the game changer

But the real bonus would be in using natural gas as transportation fuel on a large scale. This is where we would save real money, while shielding America, at least in part, from the ill effects of turmoil in the Middle East and its impact on global oil prices. Using natural gas as transportation fuel on a large scale is entirely doable. The technology is old and proven. What America lacks is policy directives that would expedite and simplify a conversion process, including the creation overtime of distribution networks and refueling stations across the country.

Start with trucks

According to the experts, the most cost effective way to transition to natural gas is by starting with heavy and medium sized trucks. Just by converting huge fleets of truck operated by UPS, FedEx, AT&T, municipalities, state governments, and of course the Federal Government, we would increase demand for all this cheap domestic gas, while cutting down our bill for imported oil and our total emissions, as natural gas is much cleaner than diesel. At today’s prices, by converting only 10% of US vehicles to natural gas, not a fanciful goal, we could cut our imported oil bill by $ 50 billion a year. That’s $ 50 billion we could use at home instead of sending it abroad, every year. Not a bad start.

We can do this

So, as we fret about the domestic implications of the Japanese nuclear disaster and as we worry about the future of Libya, the whole Middle East in turmoil and its oil, let’s focus on the incredible natural gift of US shale gas. For once America has got real energy options.

But the nation and all those who want to invest in gas need a clear policy signal. “Yes, gas is good; and yes, we should also use it as transportation fuel, as it is so much cheaper than oil”.

The American Petroleum Institute and the oil companies it represents may not like the idea, but I do not believe that they can come up with gasoline at 75 cents a gallon any time soon, (average current prices: above $ 3.50 a gallon). Until they do, let’s go for natural gas.